RETIREMENT FINAL

Which term or phrase best completes the following sentence: "Employee contributions in 403(b) plans are ______."

C) Always fully vested. Rationale Employee contributions in 403(b) plans are always fully vested, whereas employer contributions may be subject to a vesting schedule according to plan documents.

Which of the following entities cannot establish 457(b) plans?

Churches. Rationale Churches are not considered eligible employers under IRC Section 457.

A person receiving Social Security benefits under the age of 65 can receive earned income up to a maximum threshold without reducing Social Security benefits by the earnings test. Which of the following count against the earnings threshold?

Gambling winnings. Rationale Gambling winnings are not an exempt type of income. All the others are not earned income for Social Security purposes.

Mary Jane received 1,000 NQSOs with an exercise price of $25 per share when the stock was $25 on the market. Two years from the date of grant Mary Jane exercises when the stock price is $102. At exercise, Mary Jane:

Has W-2 income of $77,000. Rationale Mary Jane will have W-2 income of the difference between the market price and the exercise price ($102 - $25 x $1,000 = $77,000). She will not have an AMT adjustment for the exercise of an NQSO.

James, age 58, has compensation of $150,000 and wants to defer the maximum to his public 457(b) plan. The normal retirement age for his plan is age 60. How much can he defer in 2018 if he has an unused deferral amount of $60,000 from age 40 to age 49?

$37,000. Rationale He can contribute $37,000 (2 x $18,500). He must be within three years of retirement and have unused deferral. Note that since he used the final 3-year catch-up, he cannot use the over 50 catch-up.

Which of the following characteristics accurately describes a 403(b) plan? 1. A self-reliant employee elective deferral plan. 2. The retirement benefit is dependent on the investment results. 3. The plan generally permits loans.

1, 2, and 3. Rationale All of the features described are common to 403(b) plans

Dr. Means has taught accounting at FAU for the last 30 years and is expected to retire next year, at age 65. FAU sponsors a 403(b) plan and a 457(b) governmental plan. She has been diligent and has always contributed the maximum amounts to each of the plans. If her salary is $100,000, how much can she contribute in total to both plans in 2018?

49,000. Rationale She can defer the maximum of $18,500 to each plan and the additional over the age of 50 catch up of $6,000 for both plans, which totals $49,000. She cannot use the other catch up provisions for 403(b) plans or 457 plans since she has maximized her deferrals in the past.

All of the following statements concerning the Social Security system are correct except:

A special one-time payment of $1,000 may be made to a deceased worker's spouse or minor children upon death. Rationale A special one-time payment of $255 may be made to a deceased worker's spouse or minor children upon death.

Which of the following concerning the Social Security system is correct?

A worker who takes early retirement benefits will receive a reduced benefit because he will receive more monthly benefit payments as payments commence earlier than if the worker had waited and retired at full retirement age. Rationale Workers entitled to retirement benefits can currently take early retirement benefits beginning at age 62. Family members of an individual who is eligible for retirement or disability benefits include a spouse if the spouse is at least 62 years old or under 62 but caring for a child under age 16. Generally, individuals who are over age 65 and receive Social Security benefits automatically qualify for Medicare.

An employer may reduce the three percent matching contribution requirement for a calendar year in a SIMPLE, IRA, but only under which of the following circumstances? 1. The limit is reduced to no less than one percent. 2. The limit is not reduced for more than two years out of the five year period that ends with (and includes) the year for which the election is effective. 3. Employees are notified of the reduced limit within a reasonable period of time before the 60 day election period for a salary reduction agreement.

All of the above must be present. Rationale All of the circumstances listed must be present to permit the employer to reduce the three percent matching contribution requirement for a calendar year in a SIMPLE IRA according to IRC Section 408(p)(2)(C)(ii).

Which of the following are characteristics of a phantom stock plan? 1. Benefits are paid in cash. 2. There is no equity dilution from additional shares being issued.

Both 1 and 2. Rationale The employee does not actually receive stock in a phantom plan. Instead, the employee receives credits for the stock and the benefits are later paid in cash.

Medicare Part A provides hospital coverage. Which of the following persons is not covered under Part A?

) A person 62 or older and receiving railroad retirement. Rationale Medicare Part A requires a person to be age 65. People who are disabled or have permanent kidney failure are entitled to Medicare at any age.

Distributions may be paid from a 403(b) account after:

Employee death or disability. B) Employee turns age 59½. C) Employee is separated from service. D) All of the above.**** Rationale The other event not listed was, for salary reduction contributions, the employee endures a severe hardship according to IRC Section 403(b)(11).

Joyce and Melvin have been married for 30 years. In 2018, they received $22,000 of Social Security benefits and had $12,000 of interest income. What portion of the Social Security benefit is taxable?

$0. Rationale The lesser of: 50% of $22,000 = $11,000 Or 0.5 [$12,000 + 0.5 ($11,000) - $32,000] < 0 Since the answer calculated is less than $0, none of the Social Security benefits received by Joyce and Melvin are taxable.

Kathryn taught at Fun Academic University for 25 years and is filing for Social Security retirement benefits this year, when she turns age 72. Her PIA is $1,000 per month as adjusted for inflation. How much in benefits will she receive assuming her full retirement age was 66?

$1,320. Rationale Delayed benefits will increase at 8% per year of delay up until age 70. Therefore, her benefit will be 32% higher than her PIA. She has no increase for delaying beyond age 70 and the 8% increase is not compounded.

Which of the following are permitted investments in a 403(b) TSA (TDA) plan? 1. An annuity contract from an insurance company. 2. An international gold stock mutual fund. 3. A self-directed brokerage account consisting solely of U.S. stocks, bonds and mutual funds.

1 and 2. Rationale TSA (TDA) funds can only invest in annuity contracts (Statement 1) and mutual funds (Statement 2). No self-directed brokerage accounts are permitted.

Which of the following are correct? 1. SIMPLEs provide incentives to small employers to adopt retirement plans for employees with less administrative costs and fewer set-up procedures than qualified plans. 2. SIMPLE IRAs can permit loans to employees. 3. SIMPLE IRAs require the employer either to match the employee contributions of those who participate or to provide nonelective contributions to all eligible employees.

1 and 3. Rationale Statement 2 is false. Loans are not permitted from any IRA. Statements 1 and 2 are correct.

Which of the following types of 457 plans permit employees to defer recognition of income without any risk of forfeiture? 1. Public 457(b) plans. 2. 457(f ) plans. 3. Private 457(b) plans.

1 only. Rationale Assets in 457(f ) plans and private 457(b) plans must be subject to a substantial risk of forfeiture.

Brisco, now deceased, was married for 12 years. He had two dependent children, ages 10 and 12, who are cared for by their mother age 48. His mother, age 75, was his dependent and survived him. At the time of his death, he was currently but not fully insured under Social Security. His dependents are entitled to all of the following benefits except:

A parent's benefit. Rationale A lump-sum death benefit of $255 is payable to the surviving spouse or children of the deceased worker if he was fully or currently insured. The children's benefit is payable because Brisco was either currently or fully insured. It is 75% of his PIA. The children's mother would be entitled to a benefit for caring for the children under the age of 16. His dependent mother is only entitled to a benefit if he was fully insured, not currently insured.

Individual accounts in 403(b) plans may not be in one of the following forms?

An account invested in individual stocks in companies in the S&P 500. Rationale Individual accounts in 403(b) plans must be options a, c, or d and thus, investing in individual stocks in S&P 500 companies is not allowed. Such stock may be owned through mutual funds only.

Arnie, the CEO of The Producers Inc., was awarded the following stock options from The Producers Inc. Option Grant Date Type Exercise Price FMV Number of Shares 1 1/1/2013 NQSO $15 $15 1,000 2 1/1/2018 NQSO $25 $25 1,000 During 2018 Arnie had the following transactions regarding the above options. Option Date Action Number of Options (O) / Shares (S) Market Price on Date 1 2/1/2018 Exercised 1,000 (O) $27 1 2/1/2018 Sold 1,000 (S) $27 2 12/12/2018 Exercised 1,000 (O) $36 Which of the following is correct?

Arnie has $23,000 of W-2 income. Rationale At the exercise of an NQSO, Arnie will have W-2 income equal to the excess of the fair market value over the exercise price. In this problem, Arnie has $12,000 [($27-$15)x1,000] of W-2 income related to the 1/1/2013 options and $11,000 [($36-$25)x1,000] of W-2 income related to the 1/1/2018 options.

Ricky receives stock options for 12,000 shares of XYZ Corporation with an exercise price of $10 when the stock is trading on the national exchange for $10 per share. The XYZ company plan is an Incentive Stock Option Plan. Which of the following statements are true regarding the options? 1. Ricky will be required to hold any ISOs for more than a year after exercise and more than two years from the grant date to have long-term capital gains. 2. 2,000 of the options are NQSOs.

Both 1 and 2. Rationale To the extent the fair market value of the stock for which the ISO is exerciseable for the first time during any calendar year exceeds $100,000, the excess is treated as a nonstatutory stock option. Therefore, 2,000 of the options are NQSOs.

Dr. Wood has taught accounting at FSU (Florida Sate University) for the last 30 years and is expected to retire in a few years, at age 65. FSU sponsors a 403(b) plan and a 457(b) governmental plan. Both plans have Roth accounts available. She has been diligent and always contributed the maximum amounts to the traditional accounts in each of the plans. She is also a partner in an equipment business that has lost money the last several years and she has a net operating loss carry forward. Which of the following statements is true?

Dr. Wood is able to rollover amounts in the traditional deferral account for the 457 plan into the Roth account without terminating employment. Rationale Choice b is not correct as forfeitures cannot go into a 457 plan. Also, it is unlikely there are any forfeitures. Choice c is not correct as 403(b) plans cannot be invested in individual securities. Choice d is incorrect as the assets in a public 457 plan are protected by trust.

All of the following statements concerning Social Security benefits are correct except:

If a worker applies for retirement or survivors' benefits before his 65th birthday, he must also file a separate application for Medicare. Rationale If a worker applies for retirement or survivors' benefits before his or her 65th birthday, there is no need to file a separate application for Medicare.

All of the following statements concerning Social Security benefits are correct except:

In order to obtain SSI benefits, an individual must be age 65 or older and must be disabled. Rationale In order to obtain SSI benefits, an individual must either be age 65 or older OR must be disabled.

A worker's AIME:

Must be determined by converting actual earnings into current dollars through an indexing factor. B) Is determined from wage information over prior years' work. C) Uses the highest 35 years of indexed earnings (for workers that worked at least that long). D) Yields an average amount of monthly earnings for all indexed years. E) All of the above. Rationale All of the above are correct.

All of the following are reasons that an employer might favor a nonqualified plan over a qualified retirement plan except:

Nonqualified plans typically allow the employer an immediate income tax deduction. Rationale Nonqualified plans do not allow the employer to take an income tax deduction until the employee recognizes the income. All of the other statements are correct.

Which of the following concerning the Social Security system is correct?

SSI benefits are funded by the Treasury, not Social Security taxes, as are the other benefits. Rationale The Social Security retirement benefit is payable at full retirement age with reduced benefits as early as age 62 to anyone who has obtained at least a minimum amount of Social Security coverage. The two Medicare trust funds are the federal Hospital Insurance Trust Fund for Part A and the Supplementary Medical Insurance Trust Fund for Part B of Medicare benefits. Social Security benefits can be paid to the dependent parents of a deceased insured worker at age 62 or over.

Which of the following are correct?

Surviving spouses are entitled to 100 percent of the worker's benefit amount after the worker dies. Rationale Option a is correct. Option b is wrong because spouses have to be married 10 years, not 8. Option c is wrong because the age is closer to 82, not 92.

Antoine immigrated from Italy last century, became a citizen and has worked the better part of his life in the United States, for which he is truly thankful. His full retirement age for Social Security benefits is age 66, but after a hard life working he wants to retire at age 63 and travel in America and back to his homeland. After contacting the Social Security administration, they informed him that his benefit at age 63 would be $1,200 per month. Just prior to retiring, he sold his business for $100,000. Which of the following statements is correct?

The sale of the business will not impact the amount of his retirement benefits from Social Security. Rationale Option b is false. The sale is not earned income. Therefore, it will not result in a reduction of benefits. Option c is false because it might not increase the portion of the benefit subject to taxation. 85 percent of his Social Security benefit may already be subject to taxation. Option d is false, as he would not receive Medicare until age 65.

Jennifer received 1,000 SARs at $22, the current trading price of Clippers, Inc., her employer. If Jennifer exercises the SARs three years after the grant and Clipper's stock is $34 per share, which of the following statements is true?

Jennifer will have W-2 income equal to $12,000. Rationale At the exercise of a SAR, the employee receives the difference between the fair market value and the exercise price as W-2 income. Thus, Jennifer has W-2 income equal to $12,000 [($34-$22)x1,000].

Antoine immigrated from Italy last century, became a citizen and has worked the better part of his life in the United States, for which he is truly thankful. His full retirement age (normal retirement age) for Social Security benefits is age 66, but after a hard life working he wants to retire at age 63 and travel throughout America and back to his homeland. If his benefit at age 66 is $1,000 per month, how much will he receive in Social Security retirement benefits if he begins receiving benefits at age 63?

$800.00. Rationale The benefit reduction for early retirement is 5/9ths of 1% for the first 36 months. If Antoine retires 3 years early at age 63, then his retirement benefit will be reduced by 20% to $800 per month.

What is the maximum catch-up contribution for 2018 under the 457(b) plan "Final 3-Year" rule?

$18,500. Rationale The final 3-year catch-up is $18,500 for 2018.

Bob works for New Orleans Museum of Art, which sponsors a 403(b) plan. If Bob is 45 years old and has worked at the museum for the last 20 years, what is his maximum elective deferral for 2018?

$18,500. Rationale The salary reduction for 2018 is $18,500. An additional catch-up contribution of $6,000 is allowed for individuals who have attained age 50. The other type of catch-up contribution is not available to employees of employers such as museums.

Henry Hobbs, age 57, has compensation of $72,000. The normal retirement age for his 457(b) plan is age 62. Henry has unused deferrals totaling $22,500 as of January 1, 2018. How much can Henry defer into his 457(b) public plan for the current year?

$24,500. Rationale Henry is not within three years of the plan's normal retirement age and therefore can only defer the normal $18,500 available plus the $6,000 catch-up for those participants age 50 and over.

What is the maximum elective deferral contribution to an eligible governmental 457(b) plan for 2018?

$24,500. Rationale The maximum deferral is $18,500 for 2018. The maximum catch-up contribution is $6,000 for those participants age 50 and over. Therefore, the maximum elective deferral contribution including the catch-up is $24,500.

Which of the following is/are correct regarding SIMPLE plans? 1. A SIMPLE plan does not require annual testing. 2. A SIMPLE IRA must follow a 3-year cliff vesting schedule if the plan is top- heavy. 3. A 25% early withdrawal penalty may apply to distributions taken within the first two years of participation in a SIMPLE plan. 4. The maximum elective deferral contribution to a SIMPLE 401(k) plan is $18,500 for 2018 and $24,500 for 2018 for an employee who has attained the age of 50.

1 and 3. Rationale Statement 1 is correct. Statement 2 is incorrect. A SIMPLE plan is not subject to vesting rules, and contributions are always a 100% vested. Statement 3 is correct. The early withdrawal penalty is 25% for distributions taken within the first two years of participation. Statement 4 is incorrect. The maximum deferral to a SIMPLE plan is $12,500 for 2018. Employees who have attained age 50 by the end of the tax year will also be eligible for a catch-up adjustment ($3,000 for 2018).

BC has an Employee Stock Purchase Plan (ESPP). Which statement(s) regarding an ESPP is/are correct? 1. The purchase price of the stock may be as low as 85% of the stock value. 2. When an employee sells ESPP stock at a gain in a qualifying disposition, all of the gain is capital gain. 3. There is an annual limit of $25,000 per employee for ESPPs.

1 and 3. Rationale Statement 2 is incorrect because only the gain in excess of the W-2 income will be capital gain. Statements 1 and 3 are correct.

Which of the following statements is/are correct regarding 403(b) plans? 1. 403(b) plans are eligible for rollover treatment to IRAs, qualified plans, and other 403(b) plans. 2. Investments in stocks, bonds, and money markets are available. 3. Assets in a 403(b) plan are generally 100% vested.

1 and 3. Rationale Statements 1 and 3 are correct. Statement 2 is incorrect because investments are limited to insurance annuities and mutual funds.

Which of the following statements is/are correct regarding TSAs and 457(b) deferred compensation plans? 1. Both plans require contracts between an employer and an employee. 2. Participation in either a TSA or a 457 plan will cause an individual to be considered an "active participant for purposes of phasing out the deductibility of Traditional IRA contributions. 3. Both plans allow 10-year forward averaging tax treatment for lump-sum distributions. 4. Both plans must meet minimum distribution requirements that apply to qualified plans.

1 and 4. Rationale Statements 1 and 4 are correct. Statement 2 is incorrect because a 457 plan is a deferred compensation arrangement that will not cause a participant to be considered an "active participant." Statement 3 is incorrect because 10-year forward averaging is not permitted from either plan, since neither is a qualified plan.

All of the following statements is/are correct regarding tax-sheltered annuities (403(b) plans) except? 1. The non-age-based catch-up provision is available to employees of all 501(c)(3) organization employers that sponsor a TSA. 2. Active employees who take withdrawals from TSAs prior to 59½ are subject to a 10% penalty tax. 3. TSAs are available to all employees of 501(c)(3) organizations who adopt such a plan. 4. If an employee has had at least 15 years of service with an eligible employer, an additional catch-up contribution may be allowed.

1 only. Rationale Statement 1 is incorrect. The catch-up provision requires specified service and the correct kind of employer. Statements 2, 3, and 4 are correct.

Which of the following plans permit employers to match employee elective deferral contributions or make non-elective contributions? 1. 457(b) plan. 2. 401(k) plan. 3. 403(b) plan.

1, 2, and 3. Rationale All three plans permit employer matching and non-elective contributions. The 457 employer contribution goes against the $18,000 limit, whereas employer contributions do not go against the $18,000 limit for 401(k) and 403(b) plans.

Which of the following is true regarding employer contributions to secular trusts for employee-participants of a nonqualified deferred compensation agreement? 1. Participants have security against an employer's unwillingness to pay at termination. 2. Participants have security against an employer's bankruptcy. 3. Secular trusts provide tax deferral for employees until distribution. 4. Secular trusts provide employers with a current income tax deduction.

1, 2, and 4. Rationale Secular trusts are similar to rabbi trusts except that participants do not have a substantial risk of forfeiture and thus, do not provide the employee with tax deferral. Secular trusts provide the employer with a current income tax deduction for contributions. Secular trusts protect the participant from employer unwillingness to pay because they are funded and they protect from bankruptcy because there is no risk of forfeiture.

Taylor, age 25, works for Swim America. Swim America adopted a SIMPLE plan six months ago. Taylor made an elective deferral contribution to the plan of $8,000, and Swim America made a matching contribution of $2,400. Which of the following statements is/are correct? 1. Taylor can withdraw his entire account balance without terminating employment. 2. Taylor can roll his SIMPLE IRA into his Traditional IRA. 3. Taylor will be subject to ordinary income taxes on withdrawals from the SIMPLE. 4. Taylor may be subject to a 25% early withdrawal penalty on amounts withdrawn from the SIMPLE.

1, 3, and 4. Rationale Statement 1 is correct. A participant can take a distribution from a SIMPLE at any time without separating from service. SIMPLEs must provide 100% immediate vesting of employer contributions. The entire balance is available for withdrawal. Statement 2 is incorrect. A SIMPLE IRA cannot be rolled in to a traditional IRA until the participant has been in the SIMPLE IRA for two years. Tyler has only been in the SIMPLE for six months. Statement 3 is correct. The entire withdrawal will be subject to ordinary income tax in the year of withdrawal. Statement 4 is correct be cause the early withdrawal penalty for a SIMPLE is 25% for withdrawals occurring within the first two years of participation.

Rick has an 18% nonqualified deferred compensation plan that is funded annually by his employer. Payments are made to a separate trustee of a secular trust who was selected by Rick and his employer. The employer contributions are discontinued at Rick's death, disability, or employment termination. When Rick retires or terminates employment, he will receive the proceeds from the trust. Which of the following is/are correct regarding the deferred compensation plan? 1. The contributions are not currently taxable to Rick because they are subject to a substantial risk of forfeiture. 2. The contributions to the plan are currently subject to payroll taxes. 3. The employer can deduct the contributions to the plan at the time of the contribution.

2 and 3. Rationale Because this arrangement is a secular trust, there is no substantial risk of forfeiture to Rick. Thus, Statement 1 is false. Because the trust is not subject to the general creditors of the employer, this is straight compensation. Rick must treat the payments as constructively received, and the employer may deduct the payments as compensation immediately. The payments are subject to payroll tax since the compensation is currently earned.

Which of the following is false regarding a deferred compensation plan that is funded utilizing a rabbi trust? 1. Participants have security against the employer's unwillingness to pay. 2. Rabbi trust provide the participant with security against employer bankruptcy. 3. Rabbi trusts provide tax deferral for participants. 4. Rabbi trusts provide the employer with a current tax deduction.

2 and 4. Rationale Rabbi trusts do not provide security against employer bankruptcy or a current tax deduction for the employer.

Betty Sue, age 75, is a widow with no close relatives. She is very ill, unable to walk, and confined to a custodial nursing home. Which of the following programs is likely to pay benefits towards the cost of the nursing home? 1. Medicare may pay for up to 80 additional days of care after a 20-day deductible. 2. Medicaid may pay if the client has income and assets below state-mandated thresholds.

2 only. Rationale Statement 1 is incorrect because Medicare covers all costs for the first 20 days of skilled nursing home care and covers the next 80 days with a deductible.

Kim Cat, age 42, earns $300,000 annually as an employee for CTM, Inc. Her employer sponsors a SIMPLE retirement plan and matches all employee contributions made to the plan dollar-for-dollar up to 3% of covered compensation. What is the maximum contribution (employer and employee) that can be made to Kim's SIMPLE account in 2018?

21,500. Rationale The maximum total contribution is $21,500. ($12,500 maximum employee contribution for 2018 + $9,000 employer match). The maximum employee contribution for 2018 is $12,500. The employer has chosen to make matching contributions up to 3% of compensation (the SIMPLE maximum). Therefore, the employer can make a contribution of up to $9,000 ($300,000 compensation x 3%). Note that the annual compensation limit of $275,000 (2018) does not apply with the SIMPLE match (but does apply with a non-elective contribution)

Roger has a small convenience store with three employees. Each of the employees earns $10 per hour and they each work approximately 1,500 hours per year. His business is very successful. He recently considered adopting a defined benefit plan, but felt it was too expensive. He looked into a 401(k) plan, but thought it was too complicated. Finally, a few of his friends recommended a SIMPLE plan and told him about the basics of the plan. Which of the following statements from his friends is the most incorrect?

Employers that sponsor SIMPLEs must provide a matching contribution to employees who defer money into the SIMPLE. Rationale Choice a is true. The limit is 100, not 500, but the statement is correct. Choice b is true. SIMPLEs cannot be established if the company is maintaining another qualified plan or SEP. Choice c is true. While SIMPLEs do not have an age requirement, the statement is true. Choice d is false. Employers must offer a match or a non-elective contribution.

Antoine immigrated from Italy last century, became a citizen and has worked the better part of his life in the United States, for which he is truly thankful. His full retirement age for Social Security benefits is age 66, but after a hard life working he wants to retire at age 63 and travel in America and back to his homeland. He sold his restaurant for $150,000 and was retained by the acquiring company as a consultant for a one-year period. His consulting fee this year will be $50,000 and the benefit he expects to receive from Social Security is $2,000 per month. Which of the following statements is correct?

He would be better off beginning Social Security benefits next year. Rationale Option a is not the best answer - however, he is likely to be in a higher tax bracket because of the sale and the consulting income. Option b is not correct because the sale of the business is not earned income and will not cause in a reduction of benefits. His consulting income is earned income. Option c is not correct - there is no corresponding increase for a prior decrease. Option d is correct as his earned income will be lower and his tax bracket will likely be lower.

Roger has a small convenience store with three employees. Each of the employees earns $10 per hour and they each work approximately 1,500 hours per year. His business is very successful. He recently considered adopting a defined benefit plan, but felt it was too expensive. He looked into a 401(k) plan, but thought it was too complicated. Finally, a few of his friends recommended a SIMPLE plan and told him about the basics of the plan. Which of the following statements from his friends is the most correct?

If Roger's salary is $500,000 and the SIMPLE used a match, then his match would generally equal $12,500. Rationale Choice a is correct - the compensation limit for qualified plans is not considered if the SIMPLE has a matching contribution. Thus, 3% times $500,000 equals $15,000, but the match is limited to the annual limit of $12,500 (2018). Choice b is false - SIMPLEs have 100% vesting. Choice c is false - a non-elective benefit equals 2%. Thus, the employees would receive $300 each ($15,000 x 2%). Choice d is false - He could establish a SIMPLE 401(k), but most often a SIMPLE IRA is established.

Mike was awarded 1,000 shares of restricted stock of B Corp at a time when the stock price was $14. Assume Mike properly makes an 83(b) election at the date of the award. The stock vests 2 years later at a price of $12 and Mike sells it then. What are Mike's tax consequences in the year of sale?

Mike has a long-term capital loss of $2,000. Rationale In the year of sale, Mike will have a long-term capital loss of $2,000 ($14,000 - $12,000) because his right to the stock vested. When 83(b) is elected, losses are permitted after the right to the stock has vested.

On July 31, 2012, B Corp sold 1,000 shares of its stock to Mike, an employee, for $12 per share. At the time of the sale, B stock was trading for $30 per share. The stock was to vest in 7 years on July 31, 2020. This restriction was stamped on the certificates. On July 31, 2019, the B stock was trading for $125 per share. Mike sold the stock in September 2020 for $150 per share. Assuming no special elections, how much must Mike include in income and in what year? Option Year Amount A 2012 $18,000 B 2012-2020 Ratable gain based on year-end value C 2019 $113,000 D 2020 $138,000

Option C. Rationale When the substantial risk of forfeiture expires on July 31, 2019, Mike has income of $125,000 less the adjusted basis of $12,000, or $113,000. Mike will also have a gain of $25 per share from the date the stock vested until he sells the stock.

In 2018, Chip, an accomplished professional race car driver, is to receive a signing bonus for agreeing to drive for Hot-Lap International, a racing team. Hot-Lap agrees to establish a NQDC agreement with Chip to defer the bonus beyond Chip's peak income producing years. Hot-Lap transfers the bonuses to an escrow agent, subject to the risk of forfeiture to team creditors in bankruptcy, who invests the funds in securities acting as a hedge against inflation. The bonus is deferred until 2019 and is then paid to Chip in years 2019-2028. When is the income deductible by the employer and includible by Chip? Option Employer Deduction Employee Inclusion A 2018 2018 B 2019 2019 C 2019-2028 2019 D 2019-2028 2019-2028

Option D. Rationale The income is only deductible when includible by Chip in 2019-2028.

Social Security is funded through all of the following except:

Sales tax. Rationale Employee and employer payroll tax and self-employment tax are the sources of funding for Social Security. Sales tax does not fund Social Security.

Cindy Sue has been with CS Designs, Inc. for five years. CS Designs has a deferred compensation plan to provide benefits to key executives only. CS Designs contributed $400,000 into a trust for Cindy Sue's benefit under the company's deferred compensation plan. The plan requires that executives must work for the company for 10 years before any benefits can be obtained from the plan. Cindy Sue has come to you to determine when she will be subject to income tax on the contribution by the employer. Which of the following is correct?

Since Cindy Sue cannot receive the benefits until she has been with the employer for 10 years, the substantial risk of forfeiture doctrine will not require inclusion in income for the current year contributions made by the employer. Rationale The economic benefit and constructive receipt doctrines will not cause inclusion because the assets are forfeitable if she does not stay the required length of service. Deferred compensation plans are by nature discriminatory. The contributions will be included if the employee has an economic benefit, no risk of forfeiture, or constructive receipt.

Part B of Medicare is considered to be supplemental insurance and provides additional coverage to participants. Which of the following is true regarding Part B coverage?

The premiums for Part B are paid monthly through withholding from Social Security benefits. Rationale Only option b is correct. Option a is incorrect because participation can occur after the initial eligibility. Participation is not required to be maintained for life, and Part B does have deductibles and/or coinsurance.

Joe Bob receives stock options (ISOs) with an exercise price of $18 when the stock is trading at $18. Joe Bob exercises these options two years after the date of the grant when the stock price is $39 per share. Which of the following statements is correct?

Upon exercise Joe Bob will have no regular income for tax purposes. Rationale Joe Bob does not have income at the date of exercise. Joe Bob's adjusted basis will be $18. The AMT income is equal to the difference between the fair market value and the exercise price ($39 - $18 = $21).